Ryland Homes CEO Larry Nicholson won't be recommending a hair-of-the-dog remedy for the post home buyer tax credit hangover.
The time is over for government help for the housing industry, Ryland Homes CEO Larry Nicholson told analysts during the company's second quarter earnings call. "At some point the home building industry must recover on the basis of actual demand."
"I don't know how much more we could do for this industry to keep subsidizing it," he said at another point during the call in answer to an analyst's question about federal stimulus. "I just don't think you can keep going along the way we have. I don't think you can keep band aids on things. I think you have to rip the band aid off."
For Ryland, it appears the band aid has already been ripped off and the pain can be seen in its quarterly loss of $21.8 million, $0.40 a share as well as its 44.2% sales decrease to 958 units, down from 1,716 in the same quarter of 2009. Part of that decrease was attributed to 17% fewer active communities as well as the tax credit expiration that dropped absorption rates to 1.8 homes per community versus 2.5 in the same period last year.
Ryland was able to push through closings for 1,505 homes in the quarter, every home it had sold to people expecting the tax break by the original June 30 deadline. Last year, same quarter, Ryland closed 1,091 homes. At the end of June, Ryland had 487 spec homes on its books, 162 finished.
Gross margins on sales were also up, 15.9 percent, 200 basis points better than first quarter and 800 better than last year.
Nicholson said the company has not been offering increased incentives to any increased degree and that he hasn't' seen other builders doing it either across the board. "So far I would say that the pricing discipline is pretty good among the builders," he said.
However, if sales continue to be sluggish, that could easily change. "I believe there will be some pricing pressure in the near term if sales don't pick up."
In the meantime, Ryland management considers increasing its new community count a priority. The company managed to open 23 new projects as it closed out 19 in the last quarter, a victory toward stopping the company's lot erosion from 75,000 at peak to about 20,000 now. Ryland is optioning most of the lots it is acquiring now versus buying.
Margins in the new communities are between 400 and 600 basis points higher than the company's legacy assets. Unfortunately, this year the company expects only between 5% and 10% of its sales to come from new communities. That is expected to grow next year to 40% of all closings. The company is set to add 33 new communities in this quarter that will start closing homes next year.
If sales continue to be anemic, Nicholson said the company will have to "adjust."
"We have adjusted fairly well in the past,' he said. "We certainly worry about how the lower volume will impact us and we would like to use the cash we have to re-grow the business."